HSBC Holdings PLC HSBC, -0.76% will pay $765 million to settle Justice Department claims that it willfully covered up risks associated with residential-mortgage products in the run-up to the last housing-market downturn.

Between 2005 and 2007, the bank placed defective mortgages into residential mortgage-backed securities it created and sold, the Justice Department alleged Tuesday. Bank employees overlooked mortgages in the securities that were likely to default and failed to tell investors about the risks, according to prosecutors.

“When deals went south, investors who trusted HSBC suffered. And when the mortgages failed, communities across the country were blighted by foreclosure,” Bob Troyer, U.S. Attorney for the District of Colorado, said in a statement.

While the London-based financial-services firm agreed to pay the penalty, it denied the government’s claims. In prepared remarks, Patrick Burke, chief executive of the company’s U.S. unit, said the firm was pleased to have resolved the matter.

An expanded version of this report appears on WSJ.com.

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